Saturday, February 10, 2007

Acting Locally To Affect the Environment Globally

Disclosing the Total Carbon Emitted in Producing Consumer Products

What if every consumer product had a label which stated how much carbon had been emitted in producing it? … like food products that have labels disclosing their ingredients. In the same way that I may want to know how much fat I am eating with my diet yogurt, I may also want to know how much carbon went into the environment to make the yogurt. If I am buying a Dell laptop, I want to know how much smoke Dell put up in the air to manufacture it – the direct emissions – and I also want to know the total amount of carbon that was put into the atmosphere to make each of the components Dell bought from each of its suppliers all over the world – the indirect emissions. I really want to know the Total Carbon Emitted (TCEs) in making all the parts in my computer, including the shipping.

By demanding that all products and services disclose the total carbon emitted in producing them, we could be laying the foundation for a real market based ecosystem to control carbon emissions world wide. We would be pushing power away from the government and politicians, towards the consumers and voters, giving individuals incredible leverage to act locally and affect change globally.

Power to the Consumer

Why have so many people bought the hip and hybrid Toyota Prius? Surely, to help conserve energy by using less gas. But also because it is a statement that they care about the environment – a small palatable step we can all take to try and make a difference. The popularity of the Prius shows that consumers do want to make this statement publicly. The problem is that there aren’t that many things consumers can do to make a difference to the environment, yet cost little enough to be doable, while having a large ‘feel good’ factor.

Total Carbon Emitted (TCE) disclosures mean that many more of us – the majority who want to make a statement with a ‘feel good’ factor, without incurring large costs - can make small choices every day that make a difference. We could buy the diet yogurt that took less carbon to produce because of its packaging materials. We could use the overnight mail service that emits less carbon per package delivered. And so on and so forth…

Leave It to the Marketers

Total Carbon Emitted (TCE) Disclosures on products would allow the increasing number of mainstream environmentally conscious consumers to exercise choice and affect the markets. In turn, this allows companies that emit less carbon in manufacturing their products to advertise this fact, and try to offer more differentiated products to this market segment. They would invest in raising awareness, and in educating the market so as to expand their market segment. In other words, they would create marketing programs that try to increase the number of people who buy products based on their Total Carbon Emitted Disclosures – that is, people who are concerned about the environment.

As an aside, imagine this TV ad for example: Black smoke gushes out of a coal fired power plant in China. Newly manufactured Toyota cars roll out of an adjacent building. A voice says that it would take twice the level of emissions to manufacture a Toyota than the new Chevy hybrid (or whatever – I am making this up obviously)… Pan to a scene of peaceful wilderness around a GM plant and a ‘clean’ hybrid Chevy glides by. “It’s not just the gas you consume – it’s also what went into making the car you drive.”

It would be nice to have companies compete on this issue!

Acting Locally to Affect Carbon Emissions Globally

And in the same way that Hollywood and Silicon Valley trend setters started buying Toyota Prius cars, such trend setters may decide to buy other products with lower TCEs, and start to create a trend. TCE’s would allow Gladwell’s market mavens, connectors and salesmen to do their work. And if consumers pick up on this trend and make more and more choices based on TCEs, companies would then start to factor in TCEs in the choices they make, beyond marketing – in building a new manufacturing plant next to an eco-friendly power source for example, or by choosing suppliers that emit less carbon to produce their goods... Given enough momentum, and a little time, some province in China is going to decide that they are going to scrap their next coal fired power plant project and try to cater to manufacturers that address this market segment by building a more eco-friendly power plant, or at least invest in making the coal plant cleaner by using technologies like “carbon capture and sequestration”.

In other words, the chain of events led by consumer choice can have far reaching effects on decisions made all around the world in a way that a globally negotiated agreement like Kyoto never could. The top-down centrally controlled regulations are just not efficient enough. Yet, given an ecosystem of disclosures, information and marketing, consumer’s power to choose can set in motion a chain of events that create a social and business ‘epidemic’, enabling thousands of micro-level decisions to invest in cleaner technologies.

Wake Up and Smell the Carbon

Such a chain of events may seem like pure fantasy, until you think about the extent of the problem. As I previously discovered, over the next few years, the carbon emissions from new coal plants in China will be so much that they would far overwhelm many of the efforts at cutting local emissions in the US. (Another data point is that by 2015, China will be emitting more carbon than the US, roughly doubling its emissions from 2003, while the US's emissions will only grow by 15% during the same period.)

Yet, we (here in US) are the ones importing and consuming many of the products that are made using energy from those coal plants in China. I made a back of the envelope calculation which guesstimated that the carbon emissions associated with all the goods we import into the United States represents around a quarter of ALL carbon emissions within the US! That means that the carbon that was put into the atmosphere to produce all the things we import is roughly equal to all the carbon emitted by ALL transportation in the US.

Now compare the amount of environmental activism regarding cutting emissions on imported goods versus the activity regarding emissions from cars and trucks. May be, because it is difficult to impose global regulations or caps, we have given up on doing anything about it. We can lobby our government to regulate car emissions in the United States, but how can we ask the government of China to regulate the carbon emitted by power plants there? Well, the lesson from Prius is that we don’t have to use regulations and international protocols! Government initiatives may have helped – but they did not create the Prius phenomena. Consumer marketing did.

All (Environmental) Politics is Local

Of course, that doesn’t mean that there is no role for regulations and politicians. What if a state like California passed a law to force every company selling more than, say, $1 billion of goods in the state to disclose the TCE on each product? Not only would such a move gain popularity among the pro-environment residents of the state, it could also set in motion another powerful chain of events. If companies were forced to invest in calculating and disclosing the TCE of their products in one state, it would be very easy for them to disclose it in other states. Once they decide to partially market their products based on TCEs, they can address other ‘pro-environment’ groups all around the world, and not just California. Such a move may make it easier for other states and countries to pass laws requiring TCE disclosures. It would also prompt other companies competing in other markets to disclose TCEs to compete on this ground. The momentum could be significant.

But Can We Measure TCEs?

Of course, skeptics would say that TCEs are difficult, nay impossible to measure. But companies like Goldman Sachs and Virgin, which have stated they want to reduce their emissions, must be calculating their direct emissions already. And various web sites allow you to estimate your own personal carbon emissions and help reduce it to zero. So standard ways of measuring emissions are becoming common place. Obviously, precisely calculating the amount of carbon put into the atmosphere by all of a company’s suppliers all over the world seems a little more complicated. But in the same way that the ‘personal carbon calculators’ are far from precise, the TCE calculations can also be estimated based on rules and standards that can be set up by the companies themselves to begin with, and by self-regulated private sector institutions (with help from organizations like the United Nations and the World Bank) over time.

In fact, the best model to follow is the one which is currently working for our own financial system. Privately funded accounting industry organizations (like the AICPA and the IASB) try to set the standards for measuring and yes, often estimating financials. Even governmental tax rules allow for estimating expenses by creating rules like the dollar expense per mile driven on a car. Why can't the same kinds of rules for estimating TCE’s be instituted with the goal of making them more and more accurate over time?

Financial Accounting rules and regulations have provided a foundation for creating our global financial markets. Governments, at their own peril, have often used regulations to ‘Cap and Trade’ this or that industry or limit this or that investment vehicle. Thankfully, they have never dared to sit down and prescribe, by decree, how much wealth each country is allowed to produce. And yet, these are the kinds of schemes that are being called for to regulate carbon emissions world wide. Effectively, (as per my previous rant), many environmental regulatory schemes give governments and not-for-profit institutions control over how much Power should be consumed (ie how much carbon should be emitted); and they leave consumers with little power to do anything. It would seem more logical for large not-for-profit institutions to regulate disclosures, for consumers to decide what to consume and how much, and for governments to make sure nobody is cheating, and… well they could have one other role...

If You Can Measure It, They Can Tax It…

The problem with purely local carbon emissions taxes is that they create a competitive disadvantage. If California taxes carbon emissions, then manufacturers can get up and go set up shop somewhere else. Some have suggested a ‘synchronized’ global carbon tax to overcome such problems. (A brief discussion from Davos here in part 6). But such a tax is recognized as being too difficult to realistically coordinate among nations. The source of the problem with such tax schemes is that they try to tax the emissions of carbon at the point of production or emission, rather than the point of consumption.

If we can find a standard way to estimate TCEs, a tax on the consumption of TCEs would have none of the issues above. (Such a tax could be like a sales tax, levied when a product is sold to consumers, based on the amount of total amount of carbon emitted worldwide in producing that product.) In fact, even if levied in just one state like California, such a tax could have global implications, re-enforcing the chain of events I described above to affect decisions about clean energy through out the world. Note that this tax could also be made income neutral to the state – meaning that it would be accompanied by tax cuts in other areas. And so, not only would it not hurt production at home, it might spur investments by companies in and out of the state to market ‘cleaner’ products in California.

What Am I Missing?

I am no expert in the environment, or in economics for that matter, but as I have started to read about carbon emissions, I can’t help but think that there must be better market-oriented ways to address the potential problem we all face. TCE disclosure is one way of tackling the issue, with the advantage that it could garner the support of so many different groups that have heretofore been opposed to environmental initiatives for various reasons:

Local industries are not disadvantaged by TCE disclosures because their carbon emissions are disclosed (or taxed) in the same way as those of a manufacturing plant outside of the country. If anything, in the short term, such a scheme would give a large advantage to manufacturing in advanced economies.

For the same reasons, labor unions can also be supportive of TCEs. (Traditionally they have been the losers of proposed local regulations which push manufacturing jobs out.)

Libertarians and free-market ideologues can support environmental regulations which do not directly interfere with market mechanisms. (It would be hard to argue against disclosures.)

I have drunk my own cool-aid and don’t see the downside to this. But I would love to hear where the thinking is flawed.